Means Test Revelations

24 May Means Test Revelations

The means test imposed on those filing bankruptcy uses certain of the IRS collection standards to create allowances for over median income debtors in certain categories. The cost of buying a car and operating a car are two of those categories.

Before means testing, my clients would frequently tell me that they spent $100 or $150 a month on “transportation.” They looked at just the price of putting gas in the tank as the cost of getting around.

It was an eyeopener to see that the IRS standard for operating a car in Northern California is $401 a month; the IRS allows $200 more a month if the car has lots of miles on it. Driving a car requires registration, insurance, routine maintenance, tires, repairs, etc. It’s expensive to get around. When you add the IRS allowed monthly payment for buying that car of $471, you’ve taken quite a hunk out of a family’s take home pay. And this is just the cost of one car.

In practice, many bankruptcy lawyers are finding that the combination of the IRS standards and the debtor’s actual necessary expenses used in the means test is not barring many from Chapter 7 relief.

I don’t believe that better understanding of the true cost of living and its impact on family budgeting will meaningfully reduce the need for bankruptcy, but a bit more awareness might slow down those who castigate bankruptcy debtors as over spending profligates.

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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.
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